At the end of July on-line travel company Expedia (EXPE) announced their quarter 2 results . The result was above expectations but the stock is trading close to 52-week lows. Concerns about the macro environment are a key issue facing EXPE.

At Valuecruncher we decided to put some numbers around the future performance of EXPE using our on-line valuation tool.

EXPE Valuation

EXPE grew revenues from US$1.8 billion in 2004 to US$2.7 billion in 2007 – a 14% compound annual growth rate. Our assumptions of revenues for the next three years are US$3.0 billion in 2008 growing to US$3.75 billion in 2010 – a 12% compound annual growth rate (2007-10). We have projected EBITDA margins to be flat at 25% to 2010. We have used a terminal growth rate of 3.75%. We calculated this terminal growth rate based on year three (2009-10) growth of 10% dropping to a 3.0% stable growth rate by year 10. We used a terminal capital expenditure number of US$150 million. We have used a WACC (discount rate) of 12.0%.

The key assumptions as we see them are:

EXPE Revenues for the next three years. We believe that 12% per annum growth (2007-10) is a reasonable estimate.

EXPE WACC. We view EXPE’s WACC in the 11-13% range. We took a mid-point. This discount rate is intended to reflect the potential uncertainties of the EXPE cash flows in the near term.

Valuecruncher valuation model of EXPE with interactive assumptions

Our analysis incorporates the cash and debt on the EXPE balance sheet – Valuecruncher calculates a net debt number.

Our analysis gives a valuation of US$23.21 per share which is 20% above the current share price of US$19.27.

Based on our analysis the current share price looks cheap. Play with our assumptions – what does your analysis say?

Valuecruncher has a database of over 1,000 companies on major international exchanges. You can explore, create and share valuations for any of these companies.

Over the last four years Adobe’s revenues have grown at 25% p.a. to over $3 billion in the year ending 30 November 2007. This growth has been driven by the Creative Solutions segment consisting of Adobe’s Creative Suite and Photoshop offerings. Creative Solutions grew 37 % and represented 60% ($1.07 billion) of Adobe’s revenues in the six months to 30 May 2008.

Trading at $45.15, the upper end of their 12 month range ($30.70 - $48.47) and up 46.6% since March 17 we decided to apply the Valuecruncher interactive valuation tool to Adobe.

Adobe Chart

Discounted Cash Flow (DCF) Assumptions and Valuation

Based on historic growth rates and analysts estimates we have forecast Adobe’s revenues to grow to $4.6 billion in 2010 representing an annualised growth rate of 13.4% over the next three years. We have projected slight expansion in EBITDA margins from 40% in 2008 to 42% in 2010. We have used a terminal growth rate of 5% and a WACC (discount rate) of 11.25% (based on Aswath Damodaran’s estimate for the computer software/services sector).

Valuecruncher valuation model of Adobe and interactive assumptions.

Our analysis incorporates the cash and debt on the Adobe balance sheet – Valuecruncher calculates a net debt number.

Our analysis gives a valuation of $39.41 which is 12.7% below the current share price of $45.15.

Comparable Company Analysis

Based on our DCF analysis Adobe appears slightly over valued. To provide additional context to our analysis and the current price we have collated the trading multiples of Adobe’s competitors and other software companies. We have included companies such as Apple and Google because they are considered key competitors by Adobe despite software sales not representing their core business.

Adobe is currently trading at a P/E ratio considerably higher than the industry average and appears fully priced based on the comparable company analysis.

Key Considerations

• Can Adobe continue to grow their core offerings in the face of increasing competition and the threat of free or open source alternatives?
• Will Adobe develop new material revenue streams beyond their core Creative Solutions and Knowledge Worker Solutions segments? e.g. Mobile and Device Solutions represented $37.4 million or 2% of Adobe’s revenues in the six months to 30 May 2008.

Valuecruncher has a database of over 1,000 companies on major international exchanges. You can explore, create and share valuations for any of these companies.

Like many others, we are not quite sure what to make of IAC Interactive (IACI). IACI incorporates a range of interactive businesses including: Ask.com (the number four search engine property), the Home Shopping Network (HSN), Ticketmaster, Lending Tree and Realestate.com as well as travel business Interval International. IACI announced in November 2007 a plan to split the business into five separate listed entities. We decided to have a look at the company using the Valuecruncher interactive tool. The approach we have taken is to look at the value of cash flows being produced by the combined entity – to see where the current share price comes out. This is not a sum-of-the-parts valuation where we try to place a value on the component parts of IACI. We are in-effect assuming the break-up does not occur and the business continues as usual.

IACI grew revenues from US$5.0 billion in 2004 to US$7.4 billion in 2008 – a 12.6% compound annual growth rate. Our assumptions of revenues for the next three years are US$6.6 billion in 2008 growing to US$7.35 billion in 2010 – a 4.9% compound annual growth rate. We have projected EBITDA margins to grow from 11.0% in 2008 to 12.0% in 2010. We have used a terminal growth rate of 3.5%. We used a terminal capital expenditure number of US$250 million. We have used a WACC (discount rate) of 12%.

Valuecruncher valuation model of IACI with interactive assumptions

Our analysis incorporates the cash and debt on the IACI balance sheet – Valuecruncher calculates a net debt number.

Our analysis gives a valuation of US$21.89 which is 17.9% above the current share price of US$18.57.

Based on our analysis, IACI shares look cheap. The total looks like less than the sum of the parts. What happens with the breakup will be interesting to watch. Play with our assumptions – what does your analysis say?

Valuecruncher has a database of over 1,000 companies on major international exchanges. You can explore, create and share valuations for any of these companies.

Last week Cisco (CSCO) announced their quarter 4 results. The response was pretty positive but analysts were concerned about a lack of guidance from the data-networking equipment and software giant.

At Valuecruncher we decided to put some numbers around the potential future performance of CSCO using our on-line valuation tool.

CSCO Valuation

CSCO grew revenues from US$22.0 billion in 2004 to US$39.5 billion in 2008 – a 15.7% compound annual growth rate. Our assumptions of revenues for the next three years are US$43.5 billion in 2009 growing to US$52.5 billion in 2011 – a 10% compound annual growth rate. We have projected EBITDA margins to grow from 29.0% in 2009 to 30.0% in 2011. We have used a terminal growth rate of 4.5%. We calculated this terminal growth rate based on year three growth of 10% dropping to a 4.0% stable growth rate by year 10. We used a terminal capital expenditure number of US$1.25 billion. We have used a WACC (discount rate) of 10.5%.

The key assumptions as we see them are:

CSCO Revenues for the next three years. We believe that 10% per annum growth is a reasonable estimate to start with.

CSCO EBITDA margins. We are comfortable with a slight rise. 2011 EBITDA margins in the 29-31% range appear reasonable.

CSCO WACC. We view CSCO’s WACC in the 10-11% range. We took a mid-point.

Valuecruncher valuation model of CSCO with interactive assumptions

Our analysis incorporates the cash and debt on the CSCO balance sheet – Valuecruncher calculates a net debt number.

Our analysis gives a valuation of US$28.51 per share which is 19% above the current share price of US$23.93.

Based on our analysis the current share price looks cheap. Play with our assumptions – what does your analysis say?

Valuecruncher has a database of over 1,000 companies on major international exchanges. You can explore, create and share valuations for any of these companies.

AT&T has released its second quarter results announcing revenues of $61.6 billion and operating income of $12.5 billion for the first half of the year. This result was dominated by strong growth in wireless revenues (up 15.8% in the second quarter) and speculation on the impact of the 3G iPhone on AT&T’s third quarter numbers.

AT&T’s current price of $30.17 is at the bottom of their 12 month range ($29.72 to $42.97) so we decided to apply our discounted cash flow valuation tool to AT&T. Utilising analyst projections, AT&T’s MD&A and our own analysis we arrive at a valuation of $39.25 for AT&T, a 30% discount to the current share price.

Valuecruncher interactive valuation of AT&T and assumptions.

Supporting points for buying AT&T at $30 per share:

• 18 of the 28 analysts aggregated by Yahoo Finance rate AT&T a buy or strong buy.
• Analysts mean target price for AT&T is $41.31a 37% premium to the current share price.
• A P/E ratio (ttm) of 13.40 at the lower end of the 5 year range (10.50 - 22.10).
• AT&T’s exclusive iPhone partnership with Apple and the recently released 3G iPhone selling at twice the rate of the original iPhone.

Downside considerations:

• The impact of AT&T’s estimated iPhone subsidy of $300 per device on revenues and margins.
• AT&T’s strong wireless growth is offset by declining voice revenues (down 7.8% or $1.6 billion in the six months to 30 June 2008).
• What are AT&T’s long-term growth prospects beyond the Apple iPhone deal?

Despite these downside risks AT&T looks attractive at a $30 share price the question is whether the market will recognise the discount AT&T appears to be trading at.

McDonalds recently released their second quarter result announcing $6.1 billion revenue for the quarter and a 6.1% increase in comparable sales. At $59.77 McDonalds is trading at the upper end of their 12 month range ($46.64 - $63.69) and are currently rated a buy or strong buy by 11 of 17 analysts aggregated by Yahoo Finance.

MCD Valuation

We have assumed McDonalds revenues will grow to $25 billion in 2010 representing an annualised growth rate of 3.14% over the next three years. This growth will be driven by a combination of organic growth of existing stores and the ongoing opening of new stores.

EBITDA margins are projected to grow from 31.5% in 2008 to 33.5% in 2010 reflecting Mcdonalds’ strategy of focusing on franchised and affiliate stores. “Margins” derived from franchise operated stores for the first half of 2008 averaged 81.9% versus 17.1% for company operated stores. McDonalds re-franchised 300 stores in the first half of 2008 and plans re-franchise 1,000 to 1,500 by 2010.

We have assumed a constant capital expenditure of $2 billion per annum over the next three years consistent with McDonalds’ 2008 guidance. In 2008 this capital expenditure will be split 50/50 between the opening of 1,000 stores (net 600 stores) and reinvesting in existing stores.

A WACC (discount rate) of 8% has been used and terminal growth rate of 3% has been applied to McDonalds ongoing cash flows beyond 2010.

Valuecruncher valuation model of MCD with interactive assumptions

Our analysis incorporates the cash and debt on the MCD balance sheet – Valuecruncher calculates a net debt number.

Our analysis gives a valuation of $62.50 per share which is 4.6% above the current share price of $59.77.

The current share price is consistent with our analysis but McDonalds faces a number of challenges that limit the share price’s upside potential. These challenges include:

• Pressure on margins from increased food and labour costs (e.g. chicken and beef costs are expected to increase by between 5% and 9% in 2008) are ongoing issues facing the industry.
• Sustaining U.S. sales growth is a challenge in an extremely competitive industry exposed to changing customer tastes. Growth drivers in the key U.S. market have been chicken, breakfast, beverages and convenience. The breakfast and beverage markets are extremely competitive as major industry participants see this as a key growth area in a saturated restaurant market.
• International expansion in markets such as China and Russia has been a key driver in McDonalds growth with over 50% of the company’s operating income being derived outside the U.S. in the first half of 2008. The reported growth of McDonalds international business has been amplified by currency movements. Adjusting for currency movements McDonalds revenues decreased slightly in the first half of 2008. The company’s share price is exposed to currency movements (approximately 50% of the company’s debt is denominated in foriegn currencies) and dependent on maintaining their strong growth in international markets.
• McDonalds sees itself primarily as a franchisor and a key driver in our projected margin expansion is the focus on re-franchising restaurants. This re-franchising and the continuing opening of new stores rely on the economic viability of the individual restaurants. A potential economic slow-down and cost inflation will impact on the viability of the individual stores flowing through to both the revenue and margin growth assumptions.

With over 31,000 stores worldwide and approximately $63.5 billion in total system sales in 2007 McDonalds is the global leader in convenience restaurants that won’t be disappearing anytime soon. This scale combined with McDonalds plans to return $5.6 billion to $7.6 billion to shareholders over the next 18 months may make the company a safe haven despite the “limited” upside share price potential.

Valuecruncher has a database of over 1,000 companies on major international exchanges. You can explore, create and share valuations for any of these companies.